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Additional funds needed and percentage of sales method

Balance Sheet as of 12-31-2004
(Thousands of Dollars)

Assets

Cash $ 1,080
Receivables 6,480
Inventories 9,000
Total current assets $ 16,560
Net fixed assets 12,600
Total assets $29,160

Liabilities

Accounts payable $ 4,320
Accruals 2,880
Notes payable 2,100
Total current liabilities $ 9,300
Mortgage bonds 3,500
Common stock 3,500
Retained earnings 12,860
Total current liabilities and equity $29,160

Income Statement for 12-31-2004
(Thousands of Dollars)

Sales $36,000
Operating costs 32,440
Earnings before interest and taxes $ 3,560
Interest 460
Earnings before taxes $ 3,100
Taxes (40%) 1,240
Net income 1,860
Dividends (45%) $ 837
Addition to retained earnings $ 1,023

Suppose 2005 sales are projected to increase by 15 percent over 2004 sales. What additional funds are needed. The company is operting at full capacity in 2004, it cannot sell any of its fixed assets, and any required financing will be borrowed as notes payable. Assets, spontaneous liabilities, and operting costs are expected to increase by the same percentage as sales.

Use the percent of sales method to develop a pro forma balance sheet and income statement for 12-31-05. Use an interest rate of 10 percent on the balance of debt at the beginning of the year to compute interest (cash pays no interest). Use the pro forma income statement to determine the addition to retained earnings.

Solution Preview

Please see the attached file for the calculations. The beginning assets are 29,160. The assets are also expected to increase at the same rate as the increase in sales. The assets at en d2005 would be 15% higher or 33,534. The increase in ...

Solution Summary

The solution explains how to calculate the additional funds needed given the increase in sales and the preparation of a proforma balance sheet using the percentage of sales method.

$2.19